Hi, Fellow BPers I recently read "Long-Term Wealth" by Avery, which mentioned a 25% Cash on Cash (CoC) return, and it seemed extremely optimistic compared to current standards. I'm curious about the CoC returns you're experiencing with newly acquired properties. I did a rough calculation for a property in the metro Atlanta area, near I-75, and the numbers are somewhat disheartening. Here are the details: Sale Price: $270,000 for a single-family home with 3 beds/2 baths. Gross Income: $3,500 per month, including nightly rates and cleaning fees. Expenses breakdown: • Cleaning and Supplies: 15% • Maintenance: 7% • Utilities (Electricity, Water, Gas, Internet, Pest Control, Lawn Care): 10% • Software: 3% • Property Management: 15% With a 25% down payment and a 7% interest rate, after cosmetic updates and furnishing, the property yields less than a 1% CoC return. If purchased with cash, it shows about a 5% CoC return and an annual cash flow of $15,000. What are your figures like? I've noticed that many expenses, such as utilities and cleaning, don't seem to increase proportionally with gross income like those cabins in Smoky Mountain National Park. This observation suggests that more expensive properties with higher income might be more advantageous. Do your analyses reflect this trend? Is it that easy to just jack up nightly rates nowadays? Any insights or information you can provide would be highly appreciated! Best regards, Lee

Right now I am buying more distressed LTR houses. I can buy one for 30k to 40k that I can put 25k into and it rent for $1300 a month. These aren't advertised anywhere you have to go find them. We bought 3 of these in 2023. Some we haven't even started the rehab on. Then I got 3 more houses in 2023 from tax sales. Sold 2 for 50% to 75% profit and kept one that is free given the profit from the other 2. You have to be able to pivot to what works when the market changes.

This is why you don't read books for this nonsense. It gets outdated quick. Go figure out why you're looking to invest, then kind of work backwards and be conservative.

A few suggestions: 1. You have to complete the analysis with the sale of the property. What are the returns after a few years of owning the property, not just in year one. It needs to be a good long-term investment. 2. I believe your gross revenues aren't good on this property, so you're forcing the strategy on the wrong property. You're at $1855 after your STR related expenses (other than maintenance). Probably better off as a long-term rental. If you're committed to the strategy, consider adding a yurt or camper in the backyard with a hot tub, and your revenues go up substantially, if well-executed. You gotta doing something unique - not just rent space competitive with a hotel rooms. Those days are over. 3. If you target 20%+ CoC, you'll find it. This is very doable in Atlanta area. It's a good metric to emphasize because cash is scarce and tends to run out quickly. However, a tiny deal with 30% cash on cash is not as good as $10 million a 15% CoC deal. 4. Being less active is important to scale. STR take effort to set up and manage. Keep this in mind because your time is scarce too. It's a fair strategy to get things going, but unless you turn it into your side hustle and scale up hosting, for example, it's a time suck and will keep you from your other ventures. Be sure to put a price on your time.

I have been investing in vacation rentals since 2005. Ridiculously high returns were only possible in about a two-year window during that time. There was a brief market imbalance that quickly resolved. Don't count on 25% returns. I could have written a book about how good an investment that silver is, during the massive run-up in the 1970s, and for that moment in time, the book would have been entirely accurate. Silver is a wonderful asset to hold, but like real estate, it's really a good store of value more than anything else.

Hey Leon Its not as easy to find high performance properties as it once way, but here in the Tampa metro area you can still achieve a straight 15% CoC and even as high as 30% when leveraging a low down payment loan.

Yep that pretty much sums it up. We are in a different market than when the book was written. There may be some deals to be had, but I have found none that match my risk tolerance in the last year. I am no expert but I believe we are still in somewhat of a stalemate condition. There are folks that want to get out of their over leveraged non cash flowing properties that were purchased during the peak, but they wont sell at a loss. There are buyers, but they don't want to buy at a premium, especially due to the current rates. The "deals" that exist are most likely getting handled off-market. When anything close to reasonable hits the market, there are still enough buyers that it gets pounced on fast. And yes, your observation, of more expensive properties with higher incomes can be advantageous, but that is more of a general statement. In general the returns are greater the larger the property. Again, that is a general statement. But keep in mind, the debt/risk ratio is also higher and you typically have to deal with more issues. i.e. large groups tend to trash a place more often than small groups. And finally, no it is not really easy to jack up rates anymore. The COVID years were a gravy train with rates jacking up every few months. Those days are gone. In my market, we have 6 bedroom cabins that were bought during peak, slashing their prices that now compete with 2 bedroom cabins, because they are desperate to get bookings to cover their high mortgages. I know a number of folks who have really worked hard with Rankbreeze to get their property to the front of the list, but they have all told me the only thing that moved them now is price - and that would be a lower price. At a 5% CoC, I would be dumping my money in a hands off, no stress CD vs an STR. An STR is a job that is not worth the 5% for ME. It may be for someone else, but not me personally. There are other reasons to invest at 5%, but if cash flow is one of them, then it's not for me.

It's very hard to find COC 15%+ unless you do creative financing, but like already mentioned it's still around if you look hard enough and have patience. I have underwritten so many properties in the last year, and very few had a decent COC return. That's when the investor needs to decide if appreciation is better than cashflow. Some just want to break even and get that appreciation, while others want cashflow. Size of the home doesn't necessarily mean better cashflow, like some assume. You would think that is the case, but more often than not a small property in the right area can be a power horse! If you do happen to find a larger more expensive property there are systems, process, and pricing strategies so you don't need to worry about people coming in and damaging the property. For STR to be profitable marketing is the game, not lower prices, so make sure your PM has some great guest marketing if you decide to go the STR route.

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Updated about 1 year ago on 01/22/2024. Most recent reply

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Leon LeePoster

Real Estate Investor
Atlanta, GA

Short-Term & Vacation Rental Discussions

What is current CoC for STRs with and without 7% interest loan

Leon LeePoster

Real Estate Investor
Atlanta, GA

Posted January 19, 2024 21:38

Hi, Fellow BPers

I recently read "Long-Term Wealth" by Avery, which mentioned a 25% Cash on Cash (CoC) return, and it seemed extremely optimistic compared to current standards. I'm curious about the CoC returns you're experiencing with newly acquired properties.

I did a rough calculation for a property in the metro Atlanta area, near I-75, and the numbers are somewhat disheartening. Here are the details:

Sale Price: $270,000 for a single-family home with 3 beds/2 baths.

Gross Income: $3,500 per month, including nightly rates and cleaning fees.

Expenses breakdown:

Cleaning and Supplies: 15%
Maintenance: 7%
Utilities (Electricity, Water, Gas, Internet, Pest Control, Lawn Care): 10%
Software: 3%
Property Management: 15%

With a 25% down payment and a 7% interest rate, after cosmetic updates and furnishing, the property yields less than a 1% CoC return. If purchased with cash, it shows about a 5% CoC return and an annual cash flow of $15,000.

What are your figures like? I've noticed that many expenses, such as utilities and cleaning, don't seem to increase proportionally with gross income like those cabins in Smoky Mountain National Park. This observation suggests that more expensive properties with higher income might be more advantageous. Do your analyses reflect this trend? Is it that easy to just jack up nightly rates nowadays?

What is current CoC for STRs with and without 7% interest loan

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